Inflation expectations improve in new survey

Businesses expect inflation of 5.1 per cent in the year ahead, a 50 per cent decline in the expected rate since the last two surveys conducted by the Statistical Institute of Jamaica for the Bank of Jamaica, according to central bank Governor Brian Wynter.

It is much lower than the 7.7 per cent recorded in the February 2015 survey, the 10 per cent at the time of the December 2014 study, as well as the Bank’s own forecast, he said.

“This is a very positive development,” said Wynter. “The fact that expectations have fallen is an indication that the business community is sensing that we are in a new economic environment and that fundamental economic changes are taking place in Jamaica,” he said at this week’s quarterly briefing on monetary policy.

Referencing the 10 per cent expectations in the December study, Wynter said people were forming their expectations of future inflation by looking back in time and ignoring their most recent experiences, which pointed to a progressively lower outcome.

“This type of divergence between the current inflation rate and expectations for inflation to be higher in the future is not a good thing,” the Governor said.

“Inflation expectations are a powerful force that pushes both wage inflation and cost inflation. Unless expectations are lowered Jamaica will not be able to transition to a low-inflation environment.”

Bank of Jamaica is forecasting that 12-month inflation will fall below three per cent by September before rising moderately in the second half to end the current fiscal year between 5.5 and 7.5 per cent.

With a long-term target for inflation of between two and four per cent, in line with Jamaica’s trading partners, “we have by no means arrived at our destination but we are encouraged by the strides we have made towards our goal,” Wynter said.

The central bank’s benchmark interest rate on its 30-day Certificate of Deposit is based on its forecast for inflation.

In addition to external factors such as weather-related shocks or sharp increases in international commodity prices, the bank also monitors the pace of exchange rate depreciation and the emergence of excess demand conditions in the economy, Wynter said.

The central bank does not see the exchange rate posing a major risk to inflation at this time.
“Our assessment is that the exchange rate is currently at or close to its equilibrium,” Wynter said, referring to the United States dollar, which sold for an average rate of $116.11 to the Jamaican dollar on Wednesday.

He said the BOJ’s analysis is supported by the substantial reduction in the current account deficit in the balance of payments to an estimated 5.9 per cent of gross domestic product in fiscal year 2014/15 from 8.4 per cent the previous fiscal year, with expectations of a further reduction this fiscal year.

The central bank is forecasting economic growth of 1.5 per cent to 2.5 per cent in fiscal 2016.
“If fiscal policy remains tight, as we expect, inflation will be constrained, which will produce the additional benefit of lower interest rates”, but “if fiscal policy is loosened, it is likely that inflation expectations will rise, which will require a reaction from the Bank of Jamaica to tighten monetary policy by increasing interest rates,” the central bank chief said.

BOJ last cut its benchmark interest rate in April from 5.75 per cent to 5.5 per cent.